As soon as one starts earning income, the list of financial goals begins to build. The typical goals are buying a House, a luxury car, a leisure tour, Children education, Children marriage, retirement planning etc. The list goes on bulging as you grow. If you choose to opt for extra safe investments like Savings bank, Govt. securities, PPF etc then meeting these key objectives may require more than your lifetime savings. The best option is to invest for long term in stocks, directly or through Mutual Funds. Reason: Historically it has been proved that stocks provide the best returns among the investment assets over a long term.

What are various investment options?

The commonly used investment tools by investors:

Bank Fixed Deposits

Company Fixed Deposits

Mutual Funds

Equity Shares

Bank FDs: The safest of all the above instruments. But when compared with inflation, they are hardly able to beat it. Thus these instruments are unable to create wealth; rather we loose the real value over a period of time. Moreover if we wish to encash before the maturity we loose a good sum.

Company FDs : Definitely they offer better returns compared to Bank FDs but they are insecure in nature. Be very careful specially those offering higher returns.

Mutual Funds : Over a long term these are better bets than the above two. Money is managed by professionals headed by a ‘Fund Manager’. Risk spread-out as the investment is made in large number of companies. Unfortunately majority of Mutual Funds fail to outperform the benchmark stock indices.

Mutual Funds are riskier than shares:

Stops (read Stop Loss) are not available on Mutual Funds.

Options are not available on Mutual Funds.

Equity shares : These can provide the best route to riches provided you are a long term investor; you have the knowledge of rightly valuing shares and strong stomach to digest the whirlwinds of stock market.

Alternatively, you should have access to a good investment advisor.

Where should I invest?

In shares. Historically share market has outperformed all other investments. Warren Buffett, one of the richest persons in the world has made billions and billions of dollars through shares.

If you do not have the reliable advisor, then Mutual Funds provide you safe option. But unfortunately, as per one study as much as 2/3 rd of Mutual Funds under-perform the stock indices. Thus, if you have chosen to invest through Mutual Funds, select it very carefully!

Is investing in NFO (New Fund Offering) advisable?

No. Always invest in existing Mutual Fund scheme so that you have the proven performance before hand.

What is FPO?

FPO is an abbreviated form of “Follow on Public Offer”. If a listed company taps Capital Market with a Public Issue once again, the issue is known FPO.

How many companies are listed on BSE?

Total 5034 were listed on BSE as on 31-12-2010

What is the basis of Grouping of shares on BSE?

A Group : Highly liquid and large cap stocks.
B Group : Moderate liquidity and mostly madcap stocks
T Group : Scrips are settled on a trade-to-trade basis (the transaction cannot be squared up on same day) as a surveillance measure.
S Group : Scrips which are part of ‘Indonext segment’
Z Group : Scrips whose underlying companies have failed to comply with listing requirements and/or could not resolve investor complaints and/or have not made the obligatory arrangements with NSDL and CDSL

When is the right time to invest?

If you have the confidence in Indian economy, invest when investors are crying.

When is the right time to sell?

a) If your objective has been achieved,
b) Stock price has become over-valued,
c) Future prospects of the company or Industry or Economy are not encouraging,
d) There is gung-ho everywhere and large number of new investors are flocking in.

Is investing in IPO (Initial Public Offering) safe?

No. IPO is like a googly ball in cricket. It is very difficult to gauge the ‘Fair Value’ of a stock under offer.

What is ‘Fair Value’ ?

Stock price moves in the long run in tandem with real (intrinsic) worth of a share known as ‘Fair Value’ or ‘True Value’.

It indicates the confidence of investors in company’s future potential. Mathematically, it is the ratio of Price of a share to EPS (Earnings Per Share).

How to calculate EPS?

It is abbreviated form of Earnings Per Share. How much a company earns per share. Mathematically it is Net Profit divided by number of shares multiplied by Face Value

Is ‘Day trading’ advisable?

Day Trading : The buying and selling transactions which are closed within the same trading day. One should opt for it, only if you are comfortable (with ups and downs) and able to devote time. Fresh investors should avoid.

Shall I invest in shares through ‘Futures and Options’?

Only experienced investors (in cash market) should plan to invest in these instruments. These instruments can be used for Hedging as well Speculation. Hedging is safer, while Speculation has very high degree of un-certainties and could be a risky proposition.

What is required to succeed in share market?

Ability to find ‘Fair Value’, control on emotions and patience.

Depository and Depository Participant

My shares in electronic form are held with whom?

Depository is an organization which takes care of your stock holdings in electronic form.

What is Demat?

Conversion of Physical shares into electronic form is known as Dematerialization (shortly written as ‘Demat’)

Role of DP is to act as intermediary between investors and Depositories.

Face Value related basics

What is ‘Face Value’?

It represents the denomination of each share of a company. The par value, the apparent worth of share.

How ‘stock split’ makes the difference?

The splitting of each shares into smaller denominations (smaller Face Value) is known as ‘Stock Split’. Thus the Equity remains the same, but the number of shares increases and hence the liquidity.

How ‘bonus shares’ make the difference?

Bonus share: Free shares offered by the company in certain proportion to existing number of shares. Thus ‘Face Value’ remains same

Some good reading stuff

Book name

Publisher

Writer

Price (approx.)

One Up On Wall Street

Simon And Schuste

Peter Lynch, John Rothchild

Rs 450

Beating the street

Simon And Schuste

Peter Lynch, John Rothchild

Rs 450

Stock market dictionary

Vision Books

Praveen N. Shroff

Rs 150

It's When You Sell That Counts

McGraw-Hill

Donal L. Cassidy

Rs 1000

The Winning Investment Habits Of Warren Buffett & George Soros

Truman Talley Books

Mark Tier

Rs 650

How to find a good investment advisor ?

Many people dream of striking rich, by playing the share market. To make this castle-in-the-sky a reality, one needs to be much disciplined.
Heeding to tips from brokerage firms or hot stocks from free advisors can break you very fast.

If someone is promising the moon and stars (unbelievably high returns), be cagey, be wary of shady business practices. Remember: Honest investment advisors will never make ridiculous claims. In the current scenario anybody claiming to get you more than 50% returns should be watched with suspicion.
Look for the education and experience of the advisor. Building long-term wealth under the guidance of a good investment advisor is very easy.

If you’re frustrated that even “the hottest stock advisors” have failed, you’re not alone, most are re-hashed versions of me-too techniques.